Q4 2023 SB Financial Group Inc Earnings Call
[music].
Good morning, and welcome to the SB financial fourth quarter, 2023 conference call and webcast.
I would like to inform you that this conference call is being recorded and that all participants are in a listen only mode.
We will begin with remarks by management and then open the conference up to the investment community for questions and answers.
I will now turn the conference over to Sarah Amicus with SB financial. Please go ahead Sir.
Thank you and good morning, everyone I'd like to remind you that this conference call is being broadcast live over the Internet and will be archived and available on our website and I are.
Your state Dot com.
Joining me today are Mark Klein, Chairman, President and CEO, Tony hasn't seen out Chief Financial Officer, and Steve Lo Chief lending Officer.
Today's presentation may contain forward looking information cautionary statements about this information as well as reconciliations of non-GAAP financial measures are included in today's earnings release materials as well as our S E T.
These materials are available on our website and we encourage participants to refer to them for a complete discussion of risk factors and forward looking statements.
These statements speak only as of the date made and SB financial undertakes no obligation to update that.
I will now turn the call over to Mr. Klein.
Thank you Sarah and good morning, everyone. Thank you for joining us.
Highlights for our fourth quarter include.
Income of $3 9 million.
Both the linked and prior year quarters as total operating revenue with higher non interest income and net interest income increased profitability.
Pretax pre provision return on average assets of 143% compared to the prior quarter of just 96 basis points.
With return on tangible common equity of 16, 6%.
Total interest income of $15 1 million was up $2 2 million or 16, 9% from the prior year and up 330000 or eight 9% annualized from the linked quarter loan balances were higher from the linked quarter by $11 2 billion and have now increased 30.
$8 1 million or 4% over the prior year quarter.
Annual growth in five of our markets with Fort Wayne, increasing 40% and Columbus, increasing 8% and collectively representing the bulk of our loan growth.
Total deposits were off by $15 1 million or five 6% annualized compared to the linked quarter and were down one 5% compared to the prior year, However deposit cost increased by 3 million.
To $4 4 million or 205%.
Deposit cost rose from <unk> five 3% in the prior year to 162% in 2020.
Three as DDA balances migrate into higher cost instruments.
Loan to deposit ratio increased to 93, 5% what youre solidly back in our historical level of the mid to low ninety's and higher by nearly five basis points from the prior year.
As part of our commitment to operational excellence that includes asset quality, we continue to demonstrate top tier performance.
Our time tested approach has led to a reduction in total non occurring now standing at $2 8 million a decrease from the $3 3 million from the linked quarter.
This improvement reflects a robust annual decline of 23, 5%, bringing the ratio of non accruing loans to total loans to a peer leading 28 basis points and nonperforming assets declining to $3 3 million or 25 basis points.
Total assets.
Our diligent oversight across all loan categories has been particularly evident in the residential real estate portfolio.
Which has seen a 44% decrease in nonperforming assets compared to the prior year declining from 3 million to just $1 7 million.
Operational liquidity remained robust at nearly $500 million and continues to be quite strong at 35% of total assets.
Expenses this quarter were slightly lower than the previous quarter at $10 4 million compared to $10 5 million, reflecting a careful management of costs that included a reduction in FTE this quarter and overall a reduction of 17 for the entire year.
Mortgage origination volume, while lower than the linked and prior year quarters did deliver a very.
The high level of sold volume at more traditional levels around the 80% to 84%.
Capital levels remained strong with tier one leverage of 11%.
Common equity tier $113, five and total risk based capital of $14 seven.
Customer deposits below the FDIC insured threshold, where nearly 80% of total deposits and when we exclude any collateralized deposits that level increases to 85% in fact, our average deposit account and now stands at just $26500.
We continue to work to diversify our sources of revenue and organic balance sheet growth to talk more scale and scope remain excellent with our clients no matter the communication channel and hold peer leading asset quality constant.
First revenue diversity.
The mortgage business line continues to experience significant pressure.
This quarter, we saw mortgage originations declined to approximately $40 million.
And sold 84% or $33 million and brought our 2023 origination volume to just $216 million.
For the full year, we sold $161 million or 75%.
Interestingly, our full year volume of the 260 million as I mentioned <unk>.
The $80 million or 83% was from purchase contracts that materially resulted in all new households.
Despite the headwinds we encountered this year and our fee based business line quarterly non interest income expanded.
Our $5 $5 million this quarter was up slightly compared to the prior year and the linked quarter or 37% of total revenue.
For the full year, our total operating revenue eclipsed the $77 million Mark with noninterest income up 18 million or 31% of total revenue.
Just below our historical average of 37%.
Our title insurance business peak title experienced a 31% decline in revenue for the Europe, which was in line with the residential volume as compared to 2022.
We continue to work to integrate and do not only other community banks in our markets, but also as a supplement to commercial real estate activities for state Bank clients.
In fact throughout 2023 state Bank, we were able to capture 80% of the refinance business for commercial plans and just 13% of the state Bank CRE purchase contracts.
And doing so we referred over $437000 in revenue revenue in 2023 to our affiliates peak.
As I mentioned last quarter, we intend to raise the bar for the level of revenue from refinances at purchase contracts coming to peak to 50% in 2024.
Residential or commercial.
Year to date third quarter 2023 State Bank referred 30% of Pizza revenue.
And through this quarter, 26% are currently has more work to be done here.
Moving on to wealth management, our total assets under management increased $24 million from the linked quarter as the markets were generally all positive.
This business line is contributing annualized revenue of approximately $3 7 million and is well in line with prior quarters.
We also just added another financial adviser in the greater northeast, Indiana, Fort Wayne market and now with the backroom fully staffed we're prepared to grow new relationships and expand on existing ones.
We feel strongly that joint calling efforts with this business line in conjunction with commercial and private banking teams.
Clearly the best path to overall achievement of our growth goals.
Secondly, more scale.
Loan growth has now been positive for our last eight quarters.
Well below our historical growth levels of over 8% annually.
Headwinds getting back to the average had been higher marginal cost of funds requiring higher loan rates at inception.
Investor expectations, and an overall slowing economy.
With largely higher fixed costs.
To produce our balance sheet growth, given our 2014 kind of footprint and our market leadership model. It's critical that revised initiatives region by region by region to develop to develop and deliver organic loan growth that are all well in line with expectations for the coming year.
We expect to return to our historical growth rate in 2024.
Deposit levels were fairly flat for the quarter and the year, while the change in mix and incremental cost reduced margins.
Likewise liquidity remained relatively stable throughout the quarter as we focused on deposit stability.
Overall asset yields increased 104 basis points this year, while liquidity costs increased 114 basis points.
We will give more detail on that mix.
Third more scope.
We closed just under 500000 in SBA loans in the quarter and for all of 2023 originations total of $9 million.
This level of production with not only below our anticipated target for the year, but it is certainly less than we feel we're capable of and falls well below the objectives. We have established for this highly profitable sector.
With something better than a soft landing economic scenario for 2024, we expect to return to our pre pandemic levels a production of nearly $15 million.
And well into the top quartile of SBA producers throughout the United States do SBA lending.
Referrals.
And among our staff and business lines continue to drive deeper relationships.
For the quarter, we delivered a total of 274 referrals 148 closed for $14 9 million.
For the year, we handed off a total of nearly 1400 referrals with 761 closing for approximately $85 million and total business.
Many banks talk about inter departmental referrals, but we do know we have the business clients, we have the SaaS and the reward system to deliver them.
Rewards for both the person, referring as well as the person receiving the referral knowing what the job can be done is and we always keep the client at the center of the conversation.
Sales force and sales training as we discussed last quarter continue to accelerate.
Yeah.
Operational excellence.
Operating expense.
The resulting production levels and fee based business lines and associated expenses for all down slightly in the quarter as a result of our efficiency ratio increased to 73, 5%.
Ironically positions us well to improve our efficiency ratio with better production and expansion of asset on our balance sheet.
All that said, we successfully managed to keep our expenses in line with a more efficient run rate achieving close to the $10 million mark per quarter.
As we move forward, we will continue to build upon these strategies to further optimize our financial performance and maintaining a prudent balance between cost.
Revenue and net income given all of the market dynamics.
And finally asset quality.
Our top tier asset quality continues to provide earnings inertia.
Provision expense was a credit of 74000 for the quarter due to unfunded commitments.
And it was just 315000 for the full year.
Charge offs were again low this quarter at just $4000 and now 92000 for the entire year.
This equates to just one basis point of total loans.
Our reserve coverage of nonperforming loans now stands at a healthy, 560% and well positions us to confront economic.
Uncertainties.
Additionally, we also experienced a significant reduction in delinquencies to just 15 basis points and arriving at an all time low for our company.
Now Tony will provide us a little more detail on the quarter.
Thanks, Mark and again good morning, everyone again for the quarter, we had GAAP net income of $3 9 million with EPS of <unk> 57 per share.
As we look at the income statement this quarter.
Total margin showed an increase in linked quarter, we experienced a decline compared to the same quarter last year.
The secured despite a solid increase in our interest income which grew 17%.
The key factors mix picture is a substantial rise in funding costs.
Which have notably impacted our overall margin.
These trends highlight the complexities of our current financial environment, where higher operational costs are balancing out our revenue gains.
Our margin ended the quarter two basis higher.
The September quarter, but down from the prior year fourth quarter.
Throughout the past year, we observed a gradual stabilization of margin.
<unk> trend over the last four quarters has shown a noteworthy progression from declines of 25 to 27 basis points, respectively. Two recent uptick of two basis points.
This indicates a positive shift in our financial performance.
Looking ahead to 2024, we remain optimistic and anticipate a steady, albeit slow improvement in our margin.
Our strategies are aligned to capitalize on market opportunities and continue this positive trend.
In addition to the ongoing shift in the mix of assets away from securities to loans increases and asset pricing have driven earning asset yields higher in every quarter. This year.
And they are higher by 62 basis points compared to the fourth quarter of 2022.
Loan yields have increased by the same level as new volume and contractual repricing has stayed consistent to market movements in the rate curve.
With approximately $170 million or 17% of our loan portfolio repricing higher over the next 12 months.
We are optimistic that margins will continue to show improvement in the coming quarters.
Particularly as the yield curve flattens, and then hopefully steepens reducing funding costs.
This quarter.
Our margin betas have followed a pattern for the last half of 2023 and that our funding betas are exceeding the repricing betas on our earning assets.
Specifically the deposit and total cost of funding betas were both in excess of 100%.
These are significantly higher to the loan and earning asset base.
For the full year, the earning asset total funding betas are just slightly upside down.
Cycle to date from December of 2021, earning asset beta of 33 is slightly higher compared to the funding cost data.
We are especially pleased with how we have managed funding costs over the entire term of this rate cycle.
Yeah.
Our level of fee income to average assets remained EBIT to both the linked and prior year quarter at one 7% and as Mark pointed out.
That's a 37% level relative to total revenue.
We track our coverage of noninterest expense to assets by noninterest income to assets every quarter.
In a perfect world driving that coverage to zero as the ideal, but we understand extremely difficult.
This quarter had a negative one 5% as part of an improving trend in this metric for this calendar year as we have adjusted operating expense to reflect lower levels of fee income, especially in the mortgage business line.
For the full year, our operating expenses totaled $42 million, which was slightly below our full year 2022 expense level.
Scoring our commitment to stringent expense management in the fourth quarter of this year, we continue to focus on reducing operating expenses aligning with our ongoing strategy to enhance operational efficiency.
Compensation and benefits as a percentage of total expense were 54, 5% this quarter down from 55, three in the fourth quarter of 2022 with compensation for employee decreasing five 7% annually.
Afflicting lower commission levels and reductions in staffing.
Now, let me turn to the balance sheet.
Total size of our balance sheet experienced slightly decreased from the linked quarter due to increases in available for sale securities and loans with loans held for sale of other assets declining.
Securities as a percentage of total assets remained stable this quarter as they are now 16, 4% of total assets.
Compares to 16, and 17, 9% for the linked and prior year quarters.
Regular amortization of the portfolio reduced principal by $27 million in 2020 for which we will redirect into funding anticipated higher yielding loan growth.
The decline in rates this quarter improve the valuation of our mortgage servicing rights, which stood at 132 basis points.
The servicing rights balance remained steady at $13 9 million with the portfolio now at $1 $37 billion up just slightly to the prior year.
We continue to have very strong capital levels as Mark highlighted our common equity tier one ratio stands at 13, 5% and even with adjusting for OCI the level remains robust at 10%.
Tangible book value per share was higher by 133 basis points compared to the prior year and when we adjust for the impairment our tangible book value per share would be $19 42 per share up six 2% from year end 2022.
This quarter, we repurchased 53000 shares at an average price of $30 91.
75% of book value in just 93% of our tangible book.
Loan loss allowance was stable in the quarter reflective of both the minimal provision and charge offs.
Due to the increase in loan balances our reserve to loans decreased slightly to 1.58% when compared to the linked quarter.
But compared to the prior year, we have increased our reserve percentage by 14 basis points.
Criticized and classified loans were relatively stable compared to linked quarter standing now at $9 million.
A decrease of $3 5 million or 28% from the prior year.
And as I wrap up my comments just reminder, when we adjust our pretax pre provision earnings for all of 2023.
Reflecting the elimination of servicing rights impairment performance would be higher than last year by 105 billion.
Seven 5%.
I'll now turn the call back over to Mark.
Thank you Tony.
Once again, we continue our consistent pattern of raising our common dividend with our announcement this week of a $13.05 per share common shareholder dividend and now for the full year 52 cents per share nearly $3 6 million.
The total dividend payout ratio for this year is approximately now 30% with a common dividend yield of nearly three 4%.
And as Tony mentioned, our share buyback, which for the year now totals $3 5 million I'll continue.
Continue to be the best use of our capital.
As I close our webcast for the third quarter and now here at year end I reiterate our intent to lever our presence deeper into our low share high growth markets of 2024 to deliver organic balance sheet growth and efficiency improvement and with that sustainable EPS performance and ultimately transforming to shareholder value.
And now I'll turn it back over to Sarah for any questions, we might have from our guests.
Thank you we're now ready for our first question.
Sarah: Thank you as a reminder, if you'd like to ask a question. Please press Star then one.
Today's first question comes from Brian Martin with Janney Montgomery. Please go ahead hey.
Good morning, guys.
Right right right right. Okay, just maybe start Tony you gave a little bit of color or maybe mark whomever just on on the mortgage outlook I think you've talked about some of it.
Your kind of outlook, but just in terms of volume and kind of margins just kind of how are you thinking about as far as I don't know if youre, adding I guess at.
What you've done on the talent side or but just can you just give any.
Can I put some guideposts around how youre thinking about 2024.
Yes sure.
Sarah: Obviously.
We think that the bulge in the yield curve will settle and something less than 4% on the tenure, which maybe at the three three and a quarter might give us a little inertia, there, but clearly budgeting something.
Above that 300 350, Mark for next year.
We have discussed many times that our sweet spot is 500 million plus or minus.
R&D group now is producing somewhere near the 100 million, which should be accretive to that Columbus group and so this coming year, we're going to get a little more intentional with our leadership and now we're going to expand the base of <unk> to get our number of backup there were.
We feel we have some efficiencies to be realized in our <unk>.
Sweet spot or something of that 500 work, but as far as gains wise, we know we need to be selling more we need to be at that 80% to 85% level brand to get our gains that we want.
And now we're working more diligently through sales force.
Make sure that.
Satisfied all of the services, we can for those households, and we worked really hard to get.
Im telling you on the margin piece.
Yeah, Brian.
If we look at the fourth quarter that we just completed you know kind of at 84% level of sales.
I think is in line with what we're going to expect going forward.
Actually seeing a fairly nice level of pipeline out of the beginning of this year.
A little bit higher than I anticipated.
I think that kind of three 300 to $3 50, as mark kind of guided a little bit I think is eminently doable as we look out the next 12 months.
We are committed and we've added people in the Toledo market. We continue to look for people in the Indiana market. So I think those are going to kind of get us from what was a very very tough year in 'twenty three.
How does that level in 'twenty four.
Okay and the gain on sale margin, Tony I guess can you kind of hold it where it's at today is that did you say that maybe I missed it or is it just kind of in that range.
Yes.
We were solidly at $2 20 to $2 25 throughout all of 2023, I don't really see that moving very much on the pricing is still.
Tight.
You don't have the ability to maneuver as much as you have in the past.
The hedge was pretty successful for us during this year kind of maintaining that level. So I am comfortable that 225 level kind of going forward.
Okay and then just the last two for me and I'll step back can you give a little color on <unk>.
The margin and I guess in particular, if we do see a lower rate environment, just kind of how the puts and takes of it you know maybe you have some flatness stability of the first half of this year and then go into a lower rate environment can you just talk about the margin.
Outlook, there and what the puts and takes there and then just your outlook for organic loan growth could be the two that I had and I'll step back.
Yes.
I'll start on margin then I turn it back on the loan side.
I think as.
As we've talked about we were up kind of two basis points I do think.
Sarah: Margins going to stable to be slightly higher as we look out every quarter in 2024.
We got about 100.
$40 million of variable rate, that's going to reprice call. It anywhere between Cutrale actually 100 to 175 basis points throughout the year. We've got another $30 million of fix that's going to mature, which will roll into a call. It. Another 100 to 150 basis points as we refinance those with calls on that product.
So I think contractually, we've got a pretty good level of gain.
Got probably $50 million of overnight funding exposure that as rates come down call. It 50 to 75 basis points would be an immediate improvement to margin.
Sarah: And we have been deliberate to really shorten our level of retail call. It term funding.
To kind of get shorter on the curve coming down from 15 months call. It 12 months ago to 12 months six months ago to kind of nine months now so I do think the latter half of the year, where we anticipate two to three rate decreases in our budget for 'twenty four we will drive margin a little bit better.
Loan growth or just high level, Steve Wallace is here.
Gentlemen charge of lending, but at a high level, Brian we.
They always have high expectations.
It's clear.
Certainly like to get back to something near our historical level of loan growth and that metal of a high single digit kind of a thing but.
But we know that we're going to have to.
Priced competitively I don't think we have to take a lot of duration risk, but clearly the marginal cost of funding is a bit promo something because.
Sarah: We have to get more on the C&I like we've talked about before but we clearly have us.
Intentional strategies to maybe take a few less basis points.
That sounds a little bit, but expanding the balance sheet enough to make up and improve the total revenue level first agency.
Yes, certainly mark as you both reiterate earlier, we expect to get back into that.
Mid to high single digit loan growth, Brian We've got newer initiatives. We've got some good activity on the particularly on the commercial side seeing a little more utilization of those lines of credit as businesses optimism has returned a little bit some of that stable hard to believe we are seeing stabilization of interest rates over the past year, but some of that.
Utilization has encouraged confidence on that side, we're seeing the activity pick up and we look forward to continuing in 'twenty four.
Okay. Thanks for taking the questions guys.
Thanks, Brian Thanks, Brian Thanks.
Our next question comes from there is neither Burns would say I'm Scott. Please go ahead.
Hi, This is Nina brands over time.
But he actually asking and answering the questions I had as well so thank you.
Speaker Change: Thanks for joining us.
Thank you and as there is no further questions I will turn the call back to Mark Klein for closing remarks.
Once again, thanks, everyone for joining we look forward to.
Delivering our first quarter results in April and until then goodbye.
Thank you Sir This concludes today's conference call.
Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.